Market Matters Report / Market Matters Weekend Report Sunday 23rd June 2019

By Market Matters 23 June 19

Market Matters Weekend Report Sunday 23rd June 2019

Market Matters Weekend Report Sunday 23rd June 2019

The ASX200 put in a stellar performance last week rallying almost 100-points to make fresh decade highs leaving us entering the last week of the financial year with the market up a solid 7.4% before dividends and a whopping 23% from Decembers panic low. The local market is now sitting only 3% below its all-time high resulting in some cashed up fund managers appearing to be squeezed explaining why some stocks are literally popping higher when a buyer suddenly enters the affray (e.g. Bingo (BIN) +12.8% & Emeco (EHL) +24.7%) while any meaningful selling remains largely ascent. Under the hood volatility continues to be noticeably elevated with 8% of the ASX200 ending the week up, or down, over 10% with a perfect split of 8 winners & 8 losers. On the sector level the winners were dominated by golds & a couple of the “dogs” in our Platinum Portfolio while the losers were mainly a few lithium names and a couple of downgrades e.g. Caltex (CTX).

To put the current market sentiment / look & feel into perspective simply consider this month’s Bank of America Global Fund Managers survey:

1 – The overall result was the most bearish since the GFC with fears increasing around a possible trade war, a recession plus the potential diminishing impact from interest rate cuts.

2 – Cash levels have soared from 4.6% to 5.6%, the highest jump since the 2011 during the US debt level crunch. Similarly we saw the 2nd greatest ever drop in allocation of monies for stocks compared to bonds, the ratio reached its lowest level since 2009.

3 – A record number of investors now believe the post-GFC recovery is late cycle reflected by the 2nd  largest ever drop in EPS (earnings per share) expectations.

Hence the current “path of most pain” is clearly higher for both stocks and interest rates although with both economists & the market now targeting an RBA cash rate of 0.75% in 2019, followed by quantitative easing in 2020, there’s plenty of room to disappoint for the dovish followers i.e. if rates simply fall but not as fast as anticipated. The other concern moving forward for MM is stocks are currently only focusing on lower interest rates, if the RBA is at 0.75% at Christmas and QE is appearing likely 2020 it’s hard not to assume we will be in a recession, usually bad news for stocks.

At MM we remain in “sell mode” by definition of our large exposure to stocks in both our Platinum and Income Portfolio’s but it still feels like the markets heading higher into EOFY, however the risk / reward for the bulls is diminishing rapidly.

Short-term MM remains bullish the ASX200 while it can remain above 6580 with the next technical target ~6800.

The market hiccupped into the weekend courtesy of fresh tensions around Iran and volatility may edge higher next week ahead of the important G20 meeting being held in Tokyo on the 28th and 29th which is likely to impact stocks in July, unless the US and China announce further news before the meeting concludes on Saturday. On Friday night markets were very quiet with the SPI futures calling the ASX200 down ~10-points early tomorrow.

ASX200 Chart

I’m trying not sound like a “broken record”, for those who remember vinyl that is, but last week we again saw Australian 3-year bond yields plunge to their lowest level in history as markets factor in 2 rate cuts well before Santa arrives. It’s amazing to think that that the Australian mortgage  rates look likely to be nudging 3% in 6-months’ time but as we know its awful news for people living off term deposits, undoubtedly the catalyst for some of the fresh monies rolling into stocks following the election. We have a couple of interesting thoughts / observations around the current plunge in bond yields:

1 – Bond yields regularly form spike bottoms like in 1994, 2009, 2012 and 2016 hence we feel it’s now dangerous to pile into 3-year bonds after their yields have more than halved in just 6-months – the risks are steadily increasing for surprises on the upside for bond yields.

2 – Stocks virtually always make spike bottoms (like in December 2018) while rounded tops are more common before decent declines, perhaps in Q3 of 2019?

Last week we commented that we expected bond yields to plateau later in 2019, we have now altered this view slightly, our preferred scenario is that the bond yield elastic band continues to stretch lower before springing back, the key question is obviously from where, sorry but we aren’t prepared to jump Infront of the train just yet.

Australian 3-year bond yields v RBA cash rate Chart

Global bond yields and interest rates continue to tumble with our own still winning the race to the bottom against those in the US but interestingly the $A is now back above 69c. The gap between Australian and US 10-year bond yields is now 0.7737% hence investors are being paid to hold the worlds reference currency, an extremely unusual phenomenon over history. However we believe that investors are complacently long the $US, the pop in gold last week might imply that a few are cashing in their chips.

MM remains bullish the $A medium / long-term, a very contrarian view– perhaps we wont see the final panic dip under the 2019 panic lows that felt likely a few weeks ago.

Australian & US 10-year bond yields Chart

Australian Dollar ($A) Chart

Commodities had a big week last week as they enjoyed a falling $US and increasing tensions in Iran with gold rallying +4.3% and crude oil +9.4%.

MM believes gold is only just beginning its breakout to the upside with significantly higher levels appearing likely – we are bullish gold and its respective stocks.

Although both the iron ore and gold sectors have enjoyed stellar years we now prefer the precious metal stocks to the bulks on a relative basis.

Gold Chart

1 –  Platinum Portfolio

The MM Platinum Portfolio enjoyed another excellent week courtesy of strong performances from Emeco Holdings (EHL), NIB Holdings (NHF) and again Bingo (BIN), plus probably most importantly no negative hand grenades in a market where 8 stocks were whacked over 8%! We still  hold 15% of the MM Platinum Portfolio in cash and remain in “sell mode” looking to take some $$ from the table while also tweaking the portfolio to a more defensive stance:  https://www.marketmatters.com.au/new-portfolio-csv/

While we still feel the think the market can trade higher into the EOFY we are likely to adopt the drip feed approach sooner rather than later as selling tops is significantly harder than buying lows – note at this time we are not calling a major top but the market is becoming rich and the simple prudent risk / reward is starting to dictate higher cash and a more defensive skew in our opinion.

Following some strong moves last week we have a number of stocks close, or at, our objectives, while 2 have blown their respective levels away:

Trading around / close to our initial target area – BHP Group (BHP), Iluka (ILU), Macquarie Group (MQG) and Aristocrat (ALL).

Powering through our target area – Bingo (BIN) and NIB Holdings (NHF).

As we’ve said before this is the time to give good positions a little room as fund  managers are keen to make their portfolios look good for the EOFY rule off, a bit like the end of the calendar year. Suddenly after a very short time were seeing our respective positions in BIN up +68% and NHF up +41%.

The important message is as we consider increasing cash and becoming slightly more defensive but don’t assume we will be grabbing our large profits first just to feel good, we will consider each on their individual merit at the time.

*watch for alerts over next 2-weeks.

Bingo (BIN) Chart

Of our “losers” EHL roared out of the group last week gaining almost 25% in just a week and rewarding our patience in the process. At this stage we are not panicking on our current group of underperformers (ASL, PGH, CGC and JHG) and I actually keep looking at ORE and PGH thinking about averaging, oh what a difference a few  weeks makes!

Again the broad market threw up very few fresh buy ideas this week as it rallied straight through out initial 6600 target area, remember we are generally looking to sell into current strength, not buy. However there are 2 stocks / sectors that we still have our eyes on:

1 Telstra (TLS) $3.87 – we have fallen on our sword and decided we did take profit on TLS too early. The relatively recession proof earnings and fully franked dividend is appealing in todays current bond yield environment. MM is considering buying the current minor correction.

2 Newcrest Mining (NCM) $32 – The whole gold sector stormed higher last week but if it’s just the beginning simply who cares, MM loves the gold sector over the next 12-months.

Telstra (TLS) Chart

Newcrest Mining (NCM) Chart

2 Income Portfolio

The Income Portfolio https://www.marketmatters.com.au/new-income-portfolio-csv/ had another quiet week not transacting hence it still holds 4.83% in cash.

Basically no change, until we see any indications that bond yields have bottomed MM sees no major reason to significantly reduce our large market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / income is your objective.

The RBA Cash Rate Chart

3 –  International Equites Portfolio

No change, are sticking with this for now - “We remain bullish global equities but the “easy money” on the long side feels well and truly behind us hence our construction of an international portfolio is going to be a steady careful process.”

The US Russell 2000 (small cap) Index is usually an excellent indicator of the overall markets strength i.e. simply put, small cap stocks tend to be more sensitive to liquidity hence when enough cash is “sloshing around” for the small caps to rally strongly it implies there’s enough money for the whole index. However recently the Russell 2000 has been a significant underperformer, a rare bearish indicator moving forward.

Our favourite US stock today is Barrick gold, which may finally outperform the Australian sector if both gold and the $A rallies.

MM is bullish ABX with a target over 50% higher and a stop only 10% lower – great risk reward.

US Barrick Gold (ABX) Chart

As  we are over 10-years into the longest bull market in history understandably we are more comfortable at present holding quality businesses that are generating / sitting on large levels of cash – no need to look past Apple on this level.

On a regional basis we will be looking for value in the Emerging Markets (EEM) before Europe due  to our concern for the future of the EU and bearish view on the $US which should benefit the EEM.

Apple (US AAPL) Chart

4 - MM Global ETF Portfolio

This maybe a new concept to MM with this portfolio looking to replicate our macro opinion primarily around global stock indices, different market sectors, interest rates, commodities and currencies. These views can often be implemented using an ASX listed ETF but when required we may also turn to overseas listed ETF’s. We have regularly discussed our views across these economic themes and the time is approaching to put theory into practice. Below is a list of Australian ETF’s updated at the end of February this year:

https://en.wikipedia.org/wiki/List_of_Australian_exchange-traded_funds

We still believe there are a couple of great scenarios worth considering and preparing for but remember by definition major macro views don’t change too often:

1 – A potential spike towards 65c by the $A discussed throughout 2019 will represent great risk / reward buying in our opinion but either way we are bullish the $A over the coming 12-months.

2 –  As you all know by now we love gold over the next 12-months, this can be played via ETF’s or stocks, both locally and o/s depending on opinions around currencies and an individual companies quality / value.

3 – We are considering ways to buy the Emerging markets v Europe.

4 – Moving forward we are  watching for potential turns in stocks and bonds BUT are no hurry to fight the current bullish trends in both – see last week’s chart of the week.

A few more days above 2950 followed by a break below 2925 will trigger a “sell signal” for US stocks, potentially important for all 4 portfolios.

S&P500 Index Chart

Conclusion

Short-term Australian stocks look ok but we intend to be “trickle” sellers over the coming weeks, ideally into further strength.

US stocks look bullish for now but the relative weakness in the Russell 2000 remains a concern. A break below the 2925 by the S&P500 will trigger sell signals in US stocks.

Gold looks great and we want exposure to the sector in our portfolio (s) moving forward.

*Watch for alerts.

Chart of the week.

The below chart of Aristocrat (ALL) is presently similar to the look of a number of stocks in ASX200, if our interpretation is correct the current bull run looks to have further to run, even if the explosive gains are behind us.

Technically ALL looks ready for a rest followed by higher prices.

Aristocrat Leisure (ALL) Chart

Investment of the week.

The chart below shows the NYSE “Gold Bug Index” which we believe is / has broken out with well over 50% upside, last week’s rally was a surge to be bought not faded in our opinion.

MM likes the gold sector.

NYSE “Gold Bugs Index” Chart

Trade of the week.

Last week we had BlueScope in this section with the conclusion : MM likes BSL here and into fresh lows.

We still like BSL even after last week’s advance.

BlueScope Steel (BSL) Chart

There aren’t many stocks out there we don’t like but old favourite A2 Milk (A2M) looks destined to fall at least another 4-5%. This is a great example of how things change, the markets soaring to fresh decade highs and A2M has corrected ~20% in 2019.

MM is short-term bearish A2M.

A2 Milk (A2M) Chart

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link

Weekend Chart Pack

The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.

Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

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